Finance all about

The term finance is used very broadly, usually it is used to describe the activities associated with acquiring funds and managing them. Individuals, governments and corporate firms need this to function and thus finance is divided into three sub-categories:

Personal Finance (Financial Activities of Individuals)

Public Finance (Financial Activities of Governments)

Corporate Finance (Financial Activities of Business Entities)

What is Corporate Finance?

The term Corporate Finance is used all over the world but the aspects covered by it differ from one country to another. In UK, it means the activities in which capital is created, developed or businesses acquired. In the US, the term corporate finance is used in a very broad sense which describes the methods and decisions that deal with the capital of the firm but also with the finances of the firms.

The term Corporate Finance may give the impression that it is only used for big corporations however that is not the case. All businesses take financial decisions such as investments to be made and thus even small firms are included in the purview of corporate finance.

Finance in Business

The functions and activities undertaken in all three subcategories are essentially the same. It involves acquiring funds for investment at a low cost and allocating these resources efficiently to maximize the benefits. The considerations for each of these sub categories may however vary. Under personal finance, individuals would want to diversify their savings to get highest possible interest and the government would want to allocate its finance in a manner that maximizes social welfare.Similarly, the meaning of finance for businesses is different as well.

It involves decisions regarding choice between debt and equity, choosing between different investment plans and keeping track of the firm’s securities in the stock market.

Why do we need Corporate Finance?

It is essential that calculative decisions must be made to acquire capital by a firm. But this is not sufficient. The capital thus acquired should be channeled properly for the benefit of the firm. This aspect is the basis for separating ownership and management. In the present world, it is not just one person who provides the capital. It is the general public that provides the capital that is, many individuals are owners of a single firm through the share owned by them. Individuals who save are not just content to keep their savings in risk free areas like banks.

They are willing to diversify their savings into different sectors even if it means they have to take more risks. People are aware that risk taking is a necessity to achieve greater return for their investment. Because of this capital market has come into existence. Hence, we can say that the area of operation of corporate finance is the link between the capital market and the firm.

Role of a Corporate Manager

The Corporate Finance Manager is entrusted with the task of getting funds which are adequate for the firm’s needs. It also requires that the finance so acquired are at the lowest possible cost. Once this is done their next job is to see to it that the funds so acquired are used properly and the returns on these funds are maximized. The corporate managers are expected to choose from the various investment opportunities available to them.

Making the right capital investment is a crucial and perhaps the most important aspect of corporate finance. In addition to making decisions about capital investment, corporate managers must ensure that there is enough liquidity available to the firm so that day-to-day functioning of the firm can be smooth.

The Corporate Finance Managers have access to capital market which have many types of finance. For example, a firm can raise its financial capital either through equity capital or debt capital. Thus, they have the choice of choosing bank loans, public deposits, debentures etc. This helps a company to have a right mix of debt and equity which helps the firm to capitalize in the right manner.

Once the capital has been raised, the next step is to ensure that the finances so acquired are deployed in such a manner that there is maximization of returns to the shareholders. Being aware of the capital cost of the firm, results in correct decisions. Capital Budgeting thus plays a very crucial role in corporate finance. Corporate finance involves groups of people working together as a single unit and giving something valuable to the society. Hence a corporate manager should have a good grasp of mathematical knowledge and computer skills.

Few jobs Highlights in Corporate Finance

Corporate Finance jobs options are varied. The various jobs options available are:

Treasurer- this job involves analytical skills and ability to motivate people to perform better. It also involves raising funds and cash management.

Financial analyst- it requires the person to interact with banks and financial institutions and explain the firm’s position, keeping track of competitor’s financial position and monitoring the firm’s security at the stock market.

Cash manager and Credit manager- understanding customer requirements and negotiating skills along with a capacity to analyze accounts.

Salary Structure: A person with a bachelor’s degree will earn around $35000 to $50000 in a corporate finance job. A person with a MBA degree at the entry level will earn around $55000 to $80000.

Qualities of a good Corporate Financier

The following qualities make a successful corporate financier.

Expertise in the financial processes of the firm

Building up an excellent reputation and investing one’s time interacting with people to strengthen your relationship with them

Speak less than you listen. A good financier spends time listening to understand the other parts of the company and how finance can impact it and how it fits into the other activities.

Functions of Corporate Finance

Corporate Finance is essential to all firms. It aims at increasing the shareholder value. This requires that a corporate manage must balance the available funds between all projects, choose and invest wisely in projects that appear to be the most feasible, maximize profits of the business and pay dividend on shares regularly so that shareholders are satisfied.

We now take a look at certain functions or activities that must be carried out to ensure that all the above stated aims or targets of corporate finance are fulfilled:

Capital Structure - The managers must ensure that the there is an optimal mix of debt and equity so that profits are maximized. An investment project can be financed either by using funds available with the business (surplus profits or reserves) or by issuing debt or equity. Raising debt would mean that the firm has to pay additional interest on the borrowed sum of money and issuing new shares would mean diluting control of the company. Self-generated capital avoids both shortcomings but the firm must have excess funds available at that point of time. Thus, the manager must evaluate all the pros and cons of a source of capital before arriving on a decision.

Project valuation - At any given point of time, a business will have several interesting investment opportunities available. Managers often choose net present value (calculated as the difference between the present value of cash inflows and the present value of cash outflows over a period)which measures the profitability of the investment opportunities. The project with the highest net present value is chosen. In addition to the net present value, other factors need to be analyzed as well, such as flexibility of the project and the risk or uncertainties associated with it. To account for uncertainty, managers undertake a sensitivity analysis where the analyst will change a key factor, ceteris paribus, that is keeping other inputs and conditions constant.

Dividend Policy - The managers must decide when, how and how much of dividend must be paid. Dividends can be paid when there is excess or surplus cash in the business. Managers must decide whether to pay dividend now or postpone the payments to a later date, they must decide what amount or how much dividend must be paid and they must decide if they want to make cash dividends or provide shareholders an option of share buyback.

Working Capital Management - In addition to managing the capital structure and investment decisions of the business the managers must ensure that the business is equipped with enough working capital to carry out day-to-day business activities as well. This would mean that the managers have to ensure that the business has enough cash to meet all the expenses to be paid, an ideal level of inventory so that business can run smoothly and at minimum cost, ,making the interest payments on time, and finding a suitable source for short term credit financing.

Corporate Finance, Investment Banking and Risk Management

Since corporate finance is a broad concept, covering several functions of a business, there is some ambiguity associated with it. While corporate finance refers to all the functions discussed above in the United States of America, in the United Kingdom it includes investment banking as well. Investment banking is the activities associated with raising capital for a corporation.

Financial Risk Management involves identifying and mitigating risks associated with the fall in value of the corporation due to changes in factors such as interest rates, price levels and foreign exchange. Since these functions are similarly or closely linked to the functions of corporate finance, they are often confused. Corporate finance is a broad concept that covers all functions associated with maximizing shareholder value.